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A healthy correction

From a thematic, sector and geographical exposure perspective, fund positioning has not changed materially since the final quarter of 2016.

Real GDP growth in the UK has been impacted by the fall in the exchange rate since the EU referendum but has remained around 1.5%. Consumption, which accounts for around 60% of UK GDP, has been constrained by the squeeze on real incomes, which has only latterly turned positive. Global growth, while arguably less synchronised now than was the case at the start of 2018, is still robust by historical standards. While trade wars represent an unhelpful development, they are likely to marginally slow, rather than fundamentally undermine global economic expansion.

International importance

The indices against which we operate generate between 40-50% of their revenues from international markets. Against our indices, we continue to be overweight in the international space – a position that was established during the second half of 2016 – taking the view that overseas markets are likely to offer a more benign environment for growth than the UK domestic economy. Along with a muted environment for discretionary spending, key UK consumer discretionary sectors – notably retail and travel and leisure – are currently also being affected by profound structural headwinds including the shift to online and year-over-year increases in the minimum wage, which makes it incrementally more difficult for such companies to grow their profits.

Structural growth intact

From a thematic perspective, while over the course of October more highly rated, growth-orientated names have in aggregate underperformed, we continue to be overweight to ‘structural growth’ companies, as we judge that they are likely to continue to deliver to earnings expectations at the very least. We do not feel that recent market volatility marks the start of a fundamental shift in market leadership – rather, we view this as a healthy correction.

Concern about maintaining the long bull run for US equities and the unwinding of central bank support across the globe was bound to trigger increased volatility. In our view, the fundamentals are unchanged, however. The world is not a different place, and our portfolio is more attractively valued than before. We’ve been here before. Our big picture view is that this is a buying opportunity and that’s what we have been doing – taking advantage of attractive valuations to selectively top up our holdings in companies that we believe can deliver sustained earnings growth.

A Brexit fudge?

Turning to Brexit, a wide range of outcomes remains possible. We can debate the probabilities that we might assign to each but our central case would be for a fudge within which the need to make the most contentious decisions is deferred, possibly for a number of years. While this could be expected to give rise to a rally in both sterling and UK domestically exposed cyclicals, fundamental uncertainties are likely to persist and these could be expected to constrain the extent of any such rally.

In this broad scenario, we feel that our current positioning would remain appropriate.